ARM sees royalties accelerating with latest smartphone chips

LONDON (Reuters) - ARM Holdings <ARM.L>, the British company behind the processor in Apple's <AAPL.O> iPhone 6, reported a better than expected 25 percent rise in profits on Wednesday, and predicted its royalty income was set to get a big boost from smartphones.

The company, whose designs were used to produce some 3.5 billion chips in the previous quarter, reported a pretax profit of 118.9 million pounds ($182 million). Revenue, up 19 percent at 225.9 million pounds, was split evenly between licensing and royalties.

The results sent shares in ARM to the highest level for more than a year, and they were trading up 4 percent at 1,099 pence by 0930 GMT.

Analysts had on average been expecting a pretax profit of 113 million pounds, according to Thomson Reuters data, and Citi said the results were better than expected on both the top and bottom lines.

Chief Financial Officer Tim Score said ARM had seen strong demand to license its newest technology, which is currently in a handful of top-end smartphones including the iPhone 6 launched in September.

"Following the acceleration in royalty revenue growth in the second half of 2014, and with a wide range of OEMs (manufacturers) introducing products based on ARM's V8 architecture this year, the outlook for royalty revenues this year is very encouraging," he said.

The group's latest chips carry a royalty rate starting from 2 percent, against 1-1.5 percent for its older designs, he said.

"Most of the benefit we are going to see from the higher royalty rates is out in the future," he told reporters.

"By the time we exit 2015 probably as many as half of the smartphones that are out there will incorporate version 8 of the architecture."

It signed 53 licensing deals during the quarter, including eight for version 8 of its Cortex-A architecture.

ARM reports royalties a quarter in arrears, so the strong demand for Apple's new products before Christmas will appear in its revenue numbers next quarter.

The company said it expected total group dollar revenues for the first quarter to grow about 10 percent year on year, based on strengthening royalty revenue growth.